Tariffs, tariffs, tariffs. That is all the media talks about these days, gleeful to see President Trump’s popularity take a hit as he imposes taxes on imports.
Nothing else gets the same attention. Inflation, unemployment claims moving lower? Wait ’til tariffs kick in, chants the chorus. Oil prices down? Manufacturing increasing? Money coming in from overseas? But those tariffs…
Given the blowback, why is Trump pushing so hard to raise the fees paid on U.S. imports?
First, because he thinks the U.S. has been treated unfairly over time by our trading partners. Second, because he wants higher tariff revenues to help offset promised tax cuts. And third — most important — because he wants to make it more attractive for companies to manufacture in the U.S.
It would be hard for anyone, even Democrats, to oppose those ambitions. But oppose them they do.
Let’s start with the president wanting to level the trade playing field. Lost in the hysteria about a “trade war” is that many countries have already waged war against the U.S. — and won.
Take Canada, the “nice” neighbor to our north. While Ottawa threatened to cut off natural gas supplies to New York and other states (which didn’t seem very nice), little has been said about the tariffs it imposes on American-made cheese, for example, which, above a certain quota, can reach 245 percent. As it happens, U.S. producers have not breached that level, but that’s because, according to the International Dairy Foods Association, “Canada has erected various protectionist measures that fly in the face of their trade obligations made under USMCA.” That charge of cheating on the trade deal between the U.S., Mexico and Canada is backed up by a USMCA dispute panel in 2022 that found Canada “non-compliant.” That’s not nice, either.
Europe imposes a fee of 10 percent on U.S.-made automobile imports, whereas we charge car companies in the European Union only 2.5 percent. Japan imposes twice the tariffs on U.S.-made goods as we levy on imports from Japan. These are the kinds of uneven tariff regimes that the president is combating. It’s high time someone did.
Trump’s second goal is to raise tariff revenues — that is, monies coming in from overseas — to help offset proposed tax cuts.
The U.S. today collects some $80 billion annually in tariff income. By doubling or tripling that amount, Trump could pay for an extension of the 2017 tax cuts. Tariffs cannot replace personal and business income taxes, which total around $2 trillion annually. However, they will be part of a package designed to trim our deficit, along with cuts to government spending (courtesy of the Department of Government Efficiency and the Republican Congress) and the higher growth expected from lower taxes and deregulation.
The need to trim our deficit was highlighted recently when the government reported that the federal budget gap for the first five months of the year totaled $1.1 trillion, up $319 billion from last year. Those numbers make a mockery of former President Joe Biden’s claims that he was reducing the deficit.
The final reason to bump up tariffs is that Trump wants to bring manufacturing back to the U.S. Is that possible? Yes, and here’s why: the major reason U.S. companies historically shipped jobs overseas is that labor costs were so much higher here at home than in, say, China or Mexico.
When Americans found out during the Great Recession that GM workers were earning all-in (including benefits) more than $50 per hour, the decline in U.S. manufacturing began to make more sense.
That is still true today; as of 2022, average U.S. manufacturing salaries were roughly $32,000 compared to about $14,000 in China and less than $5,000 in Mexico. But the enormous potential for AI to save on costs by making production more efficient reduces the importance of that differential. Factories built today will be able, with the help of new technologies, to reduce the amount of labor needed to make a car or a washing machine, for instance.
Since the number of jobs created per dollar of production may decline, it becomes even more important to entice foreign investment to the U.S., to boost total employment. Tariffs and energy — another key Trump emphasis — are key to that effort.
As the importance of labor declines, the importance of power costs is climbing. Trump’s push for revised production of fossil fuels and embrace of an all-of-the-above strategy is critical to our country’s prospects. The cost of industrial power in the U.K. and in EU countries is more than twice what we pay here at home, thanks in part to the kind of “green” policies Biden wanted to impose in the U.S. The excessive cost of electricity is a major reason that manufacturing powerhouse Germany, for instance, has been in recession for the last two years.
Germany’s Siemens, chipmaker TSMC, United Arab Emirates energy company ADNOC, Australian oil and gas producer Santos, auto maker Honda and Japanese firm SoftBank are among the overseas firms committing to new investments in the U.S.
BMW and Volkswagen are reportedly also considering expanding production here. Apple and other U.S. companies have also announced increased investments in U.S. plants.
In part, these companies are responding to Trump’s promise to lower taxes, increase energy production and lighten regulation — an agenda that drove post-election CEO confidence to the highest level in years. In part, they are responding to the threat of higher tariffs.
The media’s focus on tariffs and, recently, the possibility of a recession, is partly aimed at undermining the Trump bump. The president, along with Republicans in Congress, needs to move forward on tax cuts and deregulation efforts that will restore confidence.
They should also highlight good news: inflation ticking down, higher number of jobs available, gasoline prices down and egg prices falling, too — on the off chance that the media forgets to mention them.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim and Company.